12.1 Cybersecurity in the context of digital assets

12. Cybersecurity

Key Highlights

• Cybersecurity is increasingly important in the digital asset space, as the boom in the industry have made digital assets easy targets for cyber attackers.

• Reliance on private keys and centralization of some digital asset exchanges become the vulnerabilities that expose digital assets to cyber-attack risks.

• In the future, the emergence of innovations in cybersecurity solutions will help protect stakeholders from cyber-attacks and avoid potential loss.

Cybersecurity Theme Outline

12.1 Cybersecurity in the context of digital assets

Cybersecurity is the means of protecting networks, devices, and data from unauthorized access or cyberattacks, through practices of ensuring confidentiality, integrity, and availability of information.

How critical is cybersecurity for digital assets?

The prevalence and trustless nature of digital assets has made them a target of cyberattacks, highlighting the importance of cybersecurity.

Figure 115. Digital assets – Importance of cybersecurity

Reason Details

Vulnerabilities of digital asset exchanges

Decentralization of certain digital assets Cybercriminals who hack into and steal funds from digital assets exchanges are untraceable.

Cryptocurrencies are fully decentralized. There is no central authority that monitors the transactions and activities.

The digital assets space is not fully regulated Regulators are still figuring out the appropriate legal structures to govern the digital assets industry, leaving room for perpetrators.

Dependence of digital assets platforms on private keys Digital asset platforms are prone to cyberattacks – cybercriminals can obtain the private key to hot wallets and steal the funds. It is near impossible for victims to recover the total amount of losses.

Increasing value in digital assets and DeFI As the level of adoption and investor interest increases, digital assets and DeFi see massive growth in performance and TVL (total value locked).

Source: Techcrunch, Forkast, DappRadar

Selected examples

Cryptocurrency is one of the preferred forms of exchange, e.g. ransomware attacks.

Regulatory loopholes have provided a haven for cryptocurrency-related crime, such as money laundering, and the amount of losses suffered by victims are typically high. - Jul 2021 - Hong Kong officials identified a virtual currency money laundering scheme that involved US$155 million; - Jul 2021 – UK seized US$408 million as part of a money-laundering investigation.

There are varying degrees of regulatory scrutiny over digital assets across jurisdictions. On one end of the spectrum, China has a blanket ban on cryptocurrencies. On the other end, Seychelles and Malta are considered more digital asset friendly.

2019 – Cryptopia’s servers were hacked, and approximately NZ$30mn (US$21mn) of cryptocurrency was stolen from account holder wallets via private keys.

Since 2019, DeFi protocols have lost US$285mn to hacks and other exploit attacks. This figure is about 0.65% of the adjusted total value locked of the Ethereum-based DeFi market (DappRadar).